(Austin American-Statesman (TX) Via Acquire Media NewsEdge) July 27--
Cash was so tight at the nonprofit Lone Star Circle of Care that when rosy earnings projections did not materialize this spring, the Georgetown-based clinic system for low-income patients risked going under.

Lone Star board leaders said they were stunned in April when then-CEO Pete Perialas Jr. -- whom they recently had paid a $100,000 bonus on top of his $450,000-a-year salary -- revealed deep financial trouble at the rapidly growing health care system he had led for 11 years.

With help from a Lone Star bank loan, Perialas had spent millions of dollars to expand a medical records system and a program to guide patients to the proper care, said new CEO Rhonda Mundhenk. Perialas hoped to sell those services to health care providers outside of Central Texas, she explained. But providers weren't signing contracts at a critical time -- late last year and early this year -- and the bills were coming due. So instead of being able to tap a healthy, new funding source, Lone Star was in danger of extinction.

A great deal was at stake. Lone Star was caring for 85,000 patients -- with help from the public, including an annual federal grant of $1.15 million, payments from the government-sponsored Medicaid program and about $4 million a year from Travis County taxpayers.

As the largest outpatient safety-net provider in Williamson County, Lone Star provides a medical home to uninsured and underinsured patients who might not otherwise get care. It takes strain off of emergency rooms and other providers.

The board had seen no red flags, said Lone Star board Chairman Jack Hunnicutt. "There was no indication we were having a financial crisis, and the financial reports did not indicate we were in an impending crisis of any kind," he said.

In their first comments to the Statesman, Hunnicutt and board Vice President Tim Kennedy spoke about what went wrong at Lone Star, how the organization operated and its hopes going forward. They said the volunteer board trusted and relied heavily on Perialas.

In retrospect, "you wish more questions were asked," said Greg Hartman, one of the board's new members.

Before the crisis, Perialas had regularly reported projected revenues to the board and had always met those expectations, Hunnicutt said. In its first 10 years, revenues at Lone Star had grown from $1.2 million in 2002 to $65.2 million in 2012, according to IRS filings.

An audit received this spring for the fiscal year that had ended Nov. 30, 2013, did not identify any deficiencies or weaknesses.

But when the hoped-for contracts failed to materialize and recently opened clinics were not paying off, Lone Star and its highly paid executives were on a collision course with a severe cash crunch that they have spent several months trying to fix. They believe that after taking a series of steps, some quite painful, Lone Star is on the right track.

"We have made significant cuts without making significant cuts in services," Hunnicutt said. "We feel it's been extraordinary what the staff has done."
When the crunch became apparent, officials took a hard look at the bank loan -- a $10 million line of credit they had established. While it's not unusual for organizations needing access to cash flow like Lone Star to have such loans, the borrowing had led to big trouble.

As of Nov. 30, Lone Star had drawn down $4.5 million, according to the audit. Lone Star officials declined to say how much more might have been used by the time Perialas departed, but they decided to stop borrowing and work on paying off the loan. Since May, the organization has been paying its bills on a "cash-only basis," Hunnicutt said.

The staff also did several rounds of layoffs and clinic closures in May. Ultimately, officials closed 17 of 44 clinics and laid off 185 employees, about 28 percent of the workforce. Lone Star clinics stopped providing vision care and greatly reduced dental services. The total number of Lone Star patients is expected to fall by 9,000, to 76,000.

A nonprofit that Lone Star formed in 2007 to handle its electronic records and technology business, Centex Systems Support Services, was decimated. It went from having 56 employees to four, according to Jen Barrera, executive vice president of corporate services.

Officials also canceled a $16,500-a-month lobbying contract with Madison Policy Group, which they said was used to educate politicians about Lone Star. They also cut pay to executives and managers by $1.5 million, Barrera said.

Perialas had set the salaries of those executives, many of whom were making between $100,000 and $200,000 -- with some paid even more. The board set Perialas' pay, and Hunnicutt defended it. The amount was based on a consultant's report that analyzed comparable salaries for such executives, he said.

Asked if salaries for the other executives were too high, Hunnicutt and Kennedy said they were "competitive."
After Perialas revealed the failed investments, he retired in May. He has not returned calls from the Statesman seeking comment, and his home number wasn't working the last time the Statesman tried it on Thursday. Nor has Perialas had contact with the board since leaving in May, Hunnicutt and Kennedy said. Perialas did not help Lone Star in its efforts to overcome the financial upheaval, they said.

Even so, Hunnicutt and Kennedy refrained from criticizing him. "I'm not going to sit here and point fingers at anybody," Hunnicutt said.

Neither believes any malfeasance or illegal acts occurred. Hartman, a Seton Healthcare Family executive who took a seat on Lone Star's board this year, agreed.

"Everything was legitimate, and there was no one doing anything nefarious or illegal," Hartman said. The trouble stemmed from overly optimistic projections and bad business decisions, he said.

In retrospect, the board wishes it had asked more questions and done "a deeper dive" into Lone Star's finances, Hartman said.

In the future, "we are asking for a greater level of detail as board members," Hartman said. "I think the business side of Lone Star has changed significantly, and it's going to make them a viable organization going forward."
Seton will continue its partnership with Lone Star but won't be collaborating in as many ways as Lone Star hews closer to its mission: being a primary medical home to needy Central Texans.

A major Lone Star donor, the St. David's Foundation, gave $1 million in June for expenses and another $426,984 this month, an amount equivalent to one-twelfth of Lone Star's $5.1 million annual foundation award.

Another key donor, the Georgetown Health Foundation, provided $1.1 million in June, with $750,000 in cash and the rest in rent forgiveness on Lone Star's main clinic building in Georgetown.

Lone Star is negotiating with other landlords on rent and is current on its bills, Hunnicutt said. It has no plans for more cuts.

The board, ultimately, is responsible for what happened, Hunnicutt said.

"It might be difficult to understand, but we really regret what the community has gone through with this -- and our patients," Hunnicutt said. "We wish it hadn't happened."
Kennedy said in retrospect the board might have done some things differently, but he didn't want to be specific, nor did Hunnicutt.

The board meets monthly and is self-perpetuating, with a nominating committee that suggests new members. It had 12 members in May and now has 10. Treasurer Scott Alarcón stepped down when he initially was tapped to be interim CEO. Terri Broussard Williams said she resigned because of "increased professional responsibilities and accepting a large volunteer role on another community board."
The board is looking ahead, Kennedy said. "Our thought process has not been on past," he said. "It's how can we keep serving patients."
Perialas did many good things as a leader, not the least of which was increasing service to low-income patients, Kennedy said. "We had a great deal of faith in his vision over the past years. We've grown and served many, many people. That was the underlying feelings of the board towards Pete."
The board is confident in Mundhenk, said Kennedy and Hunnicutt. Under her leadership, steps have been taken to tighten spending.

"We're controlling all of our spending now," she said. "We have virtually no discretionary spending."
In addition, she and her staff are working on a policy that would require board approval for spending above a certain threshold, Mundhenk said. The amount has not been set.

Based on revised budget figures, Lone Star's annual budget is now estimated to be between $61 million and $62 million. Without the cuts, Lone Star was on pace to spend $87.6 million this fiscal year, Barrera said.

"The staff have done an extraordinary job to try and right this ship," Hunnicutt said. "It looks like we are at the point of achieving the stability we need."
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Lone Star's fast fall
Jan. 14, 2002: Several community leaders open the nonprofit Georgetown Community Clinic to serve the needy. Future CEO Pete Perialas Jr., a software technology executive, is a volunteer board member.

2003: Perialas becomes CEO.

2004: The nonprofit expands to include a pediatric clinic in Granger. In December, the organization becomes a Federally Qualified Health Center making it eligible for federal grants, higher payments and discounts.

October 2005: Georgetown Community Clinic changes its name to the Lone Star Circle of Care.

2006: Lone Star expands into Round Rock.

December 2007: Lone Star establishes the nonprofit Centex Systems Support Services to create an electronic medical records system and other health information technology.

April 2014: Perialas tells Lone Star board members that hoped-for contracts haven't come through and the organization is in crisis.

May: Lone Star officials take a series of steps, ultimately laying off 185 of the nonprofit's 660 workers and closing 17 of its 44 clinics. Seton Medical Center Williamson says it will close its maternity ward and neonatal intensive care unit because one of the shuttered clinics was a major source of patients. Perialas retires.

June: Lone Star gets $1 million from the St. David's Foundation and $1.1 million from the Georgetown Health Foundation to help meet expenses.

July 24: The board chooses Rhonda Mundhenk as CEO. She became interim CEO in May and had been Lone Star's CEO of clinical operations.

WATCHDOG COVERAGE
American-Statesman health reporter Mary Ann Roser was the first to report on a financial meltdown at Lone Star Circle of Care, a system of health clinics for the poor and underinsured that receives $4 million a year from Travis County taxpayers as well as federal grants of about $1 million a year and other federal funds. The troubles led to the closing of 17 of Lone Star's 44 clinics, 185 layoffs and about a 10 percent reduction in the number of people the clinics can serve.